Part 1 Introduction to income payments agreements (IPAs) and income payments orders (IPOs)
Income payments agreements (IPAs)
31.7.6Introduction to the IPA
The IPA procedure was introduced into the Insolvency Act 1986 by the Enterprise Act 2002, with effect from 1 April 2004. It is closely aligned to the regime for claiming contributions under IPOs. Section 310A [Note 1] provides for the bankrupt and the official receiver or trustee to enter into a written agreement that the bankrupt, or a third party on behalf of the bankrupt, will make regular payments of a specified amount or proportion of the bankrupt’s income into the estate for a specified period. The legislative rules governing IPAs can be found in the Insolvency Rules 1986 rules 6.193A-C [Note 2].
a) An IPA is a contract and therefore binding agreement, the terms of which are enforceable as though it were an IPO.
b) The agreement is made between the bankrupt and the official receiver or trustee, to pay a portion of his/her post bankruptcy order income into the bankruptcy estate, where it will be treated as an asset [note 3].
c) An IPA may provide for the payments to be made by a third party[Note 4]for example an employer.
d) The agreement must specify the amount payable, the interval or frequency of the payments and the amount to be paid on each occasion, [note 3] The agreement must specify the period of time during which the IPA is to have effect, which may extend beyond the date of discharge.
f) An IPA can be varied by written agreement but the period of the agreement cannot be extended beyond three years from the date the agreement originally came into force (see Part 7 for further information on variation of an IPA).
An IPA can be agreed early in the bankruptcy proceedings as the official receiver can set up the agreement and start collecting payments under the agreement when he/she is receiver and manager, before a trustee is appointed. The legislation provides for the IPA to be agreed between the bankrupt and the official receiver or between the bankrupt and the trustee.
An IPA can only be entered into prior to the discharge of the bankrupt [Note 6] and only comes into force when the official receiver or trustee signs it [Note 7]. This means that in order to ensure the IPA is valid, the agreement must be signed prior to discharge by the trustee or official receiver. The bankrupt can be allowed up to 14 days (or longer, if specified by the official receiver) to consider a draft IPA, sign and return the agreement [note 8]. The policy of the Service is to allow a 14 day "cooling off" period after the bankrupt has signed the agreement. This is not a requirement of the legislation and it must be remembered that for the agreement to come into force it must be signed by the official receiver prior to the bankrupt receiving his/her discharge(see also Part 5 paragraphs 31.7.133 to 31.7.137). The official receiver should not delay signing the agreement where the bankrupt’s discharge will occur before the 14 days expires. Ideally the agreement should be signed at the earliest opportunity, in order to validate the IPA [note 9]. It is especially important to allow enough time for the IPA to be validated where an application is to be made for early discharge (see paragraph 31.7.172).
The IPA agreement must be entered into before the bankrupt receives his/her discharge. Whilst it cannot end more than three years after the date on which the agreement comes into force [note 5], it may end after the discharge of the bankrupt. The period for which the IPA is to run must be specified in the agreement signed by the bankrupt and the official receiver or trustee.
An IPA comes into force when it has been signed by both the bankrupt and official receiver or trustee [note 7] (see paragraph 31.7.9). Variation of the agreement can be made after discharge (see Part 7) by written agreement between the relevant parties, or by the court on the application of the official receiver, the trustee or the bankrupt [note 10]. The period of the agreement can be extended or reduced on variation, but cannot be extended beyond a period of three years, beginning with the date on which the agreement comes into force [note 5].
Income Payments Orders (IPOs)
It is envisaged that in cases where the bankrupt has surplus income available to make a payment to his/her bankruptcy estate, an IPA should always be sought in preference to an IPO. An IPO should only be sought in those cases where the bankrupt fails to consent to the proposed IPA or does not co-operate with the official receiver in the collection of an IPA. Where the bankrupt is failing to co-operate in the provision of information to enable an income payments calculation the official receiver should seek to suspend the running of the discharge period (see Chapter 22 Part 4 for information on suspension of discharge).
Provision is made by section 310 of the Insolvency Act 1986 [Note 11] for the trustee to apply to the court for an order requiring the bankrupt or a third party (e.g. an employer) to make regular payments from the bankrupt's income into the estate.
a) An IPO can only be made on an application submitted to court by the trustee prior to the bankrupt's discharge [Note 12], although an order can be made after discharge on an application instituted (lodged at court) before discharge.
b) An IPO is an enforceable order of the court made on the application of the trustee. It requires the bankrupt to pay a portion of his/her post bankruptcy order income, equal to the amount specified in the order, into the bankruptcy estate where it will be treated as an asset [Note 13][Note 14].
c) An IPO may provide for the payments to be made by a third party [Note 15] for example an employer.
d) The period of the IPO must be specified in the application and incorporated into the order, and may extend beyond the date of discharge [Note 16].
e) The period of the order must not exceed three years (36 months), beginning with the date on which the order was made [Note17].
f) An IPO can be varied on the application of the trustee or the bankrupt (before or after discharge) but the period of the order cannot be extended beyond three years from the date the order was made [Note 18] (see Part 5 of this chapter for further information on variation of an IPO).
Matters to be considered in both IPAs and IPOs
Section 310(7) [note 19] widely defines the income of the bankrupt for income payment order purposes as: "..every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment..".
This definition also applies to income of the bankrupt when considering an IPA [note 20].
Despite the provisions of the Welfare Reform and Pensions Act 1999, payments received by the bankrupt under a pension scheme whilst he/she remains undischarged from bankruptcy, should be included in any IPA/IPO calculation (see Chapter 61 paragraph 61.10).
In assessing the amount the bankrupt is able to pay under an IPA/IPO, the official receiver or trustee must make allowance for the "reasonable domestic needs" of the bankrupt and his/her family [note 21]. The bankrupt’s family are persons who are living with him/her and who are dependent on him/her [note 22].The assessment of "reasonable domestic needs" will be based on an examination of all the circumstances of each individual’s case. For example, it is possible that a bankrupt who has a low income may still be capable of contributing to an IPA/IPO if his/her living costs are low because he/she lives with relatives at an advantageous rate or pays a low rent.
For more detailed information on assessing income and expenditure please refer to Parts 2, 3, and 4 of this chapter and paragraphs 31.7.16 to 31.7.18 for further information on reasonable domestic needs.
It should be noted that the official receiver should not obtain an IPA/IPO, the effect of which would be to reduce the bankrupt’s remaining income below the amount needed to meet his/her "reasonable domestic needs".
The official receiver or trustee must ensure that an agreement with the bankrupt to make regular repayment from his/her income is only entered in to where the bankrupt can afford to do so. In the case of Boyden v Watson  B.P.I.R. 1131, Manchester County Court, District Judge E R Jones 27 January 2004 [note 23] the trustee made application to the court for an IPO following a failed attempt by the trustee to set up a voluntary payments agreement with the bankrupt (this was prior to the enactment of the EA2002 IPA provisions). The court stated that the only issues which required consideration were the amount the bankrupt could afford to pay and for what period. The trustee's application was dismissed because the court held (having tested the bankrupt's explanation as to the reasonableness of his monthly expenditure) that it was not possible to make an IPO as this would have the effect of reducing the income of the bankrupt to below the amount necessary to meet his reasonable domestic needs, and that to make a nominal order for the period of three years would be of no benefit to the creditors. The court commented further that the trustee's application was misleading in that, rather than seeking to obtain an IPO in order to fulfil his duty to realize and distribute the bankrupt's estate, the trustee was primarily motivated in making the application by a wish to guarantee payment of his fees.
When considering whether the bankrupt can afford an IPA/IPO the official receiver must undertake an objective assessment of the information supplied relating to income and expenditure, in the same way as is required by the court in relation to an income payments order. Further guidance as to what expenses may be considered reasonable expenditure can be found at Part 4 of this chapter. The Household Expenditure Spreadsheet (HES) which can be found in Technical Section’s area on the intranet provides details of average expenditure for various different household groups. This information is extracted from the annual Office of National Statistics (ONS ) Family Expenditure Survey and shows average monthly expenditure for a variety of different domestic groups in the format of a table, to allow easy comparison with the information as provided by the bankrupt in the Statement of Affairs or Preliminary Information Questionnaire (PIQB).
In the case of Rayatt, (Re: Rayatt (A Bankrupt)  B.P.I.R. 495) [note 24], the court held that school fees could be treated as a reasonable domestic need for income payments order purposes, as to remove the bankrupt’s eldest child from the fee paying school she attended just before taking GCSE’s would unfairly prejudice her education.
In the case of Scott v Davis  B.P.I.R.1009 [note 25], the bankrupt (Scott) appealed against a decision to make an IPO against him. The court stated that it is for the bankrupt to produce sufficient evidence to the court for a decision to be made on the matter of school fees as a "reasonable domestic need." The fact that this bankrupt was unhappy with local state schools, opting instead for private education, was not deemed sufficient in itself to make the school fees acceptable as a reasonable domestic need. The court stressed that the individual circumstances of each case must be taken into account when considering reasonable domestic need.